What to Know About No-Shop Provisions

In letters of intent (LOIs), term sheets, and acquisition agreements, no-shop provisions are often included to preserve the integrity of the negotiated deal, protect the purchaser’s invested time and resources, and ensure the transaction closes under the terms agreed to by the parties. Purchasers often include these provisions for several reasons, including:

• Preservation of the negotiated deal.
• Protection of the purchaser’s investment – time, money, and resources spent on due diligence and foregone alternative business opportunities.
• Sharing of confidential information – the purchaser may not want to share their confidential information without some assurance that the deal will close.
• Protection of the purchaser’s reputation – if the purchaser loses the deal to a competing bidder, the purchaser’s reputation may be negatively affected, potentially impacting its ability to complete future deals.

As discussed below, the vendor(s) and target corporations often negotiate exceptions to no-shop provisions that work to their advantage.

Given the impact of no-shop provisions on the outcome of M&A transactions, both the purchaser(s) and the vendor(s) must understand how these provisions operate and their potential implications in various situations.

Public vs. Private M&A Transactions

The content and the scope of a no-shop provision may vary considerably depending on whether the target corporation is a private company (“private M&A transaction”) or a public company/reporting issuer (“public M&A transaction”).

In a private M&A transaction where a gap exists between the signing of the definitive acquisition agreement and the closing of the transaction, a no-shop provision will typically:

• Prevent the vendor(s) or target corporation from soliciting or encouraging competing bids.
• Prevent the vendor(s) or target corporation from sharing information and negotiating a competing bid with competing third parties.
• Compel the vendor(s) or target corporation to inform the purchaser of any inquiry, information request, or competing bid it received.

Unless the private target corporation has minority shareholders who are not on the board of directors or involved in the negotiation of the transaction, these prohibitions and restrictions usually apply without exception to provide assurances to the purchaser of the completion of the agreed deal, also known as a no-talk provision. A no-shop provision often binds the vendor(s) and/or target corporation’s affiliates and their respective representatives (e.g., management, the board of directors, lawyers, accountants, investment bankers, finders, and others).

By contrast, a no-shop provision in a public M&A transaction is more extensive compared to a private M&A transaction, and may, in addition to the above, include the following requirements and restrictions:

• Termination of any solicitation or negotiations with third parties.
• Discontinuance of access to and disclosure of information relating to the target corporation and its subsidiaries to any third parties.
• Requesting for return and destruction of any confidential information concerning the target corporation and its subsidiaries provided to any other person.
• Providing written notice to the purchaser about or keeping the purchaser informed of the status of any unsolicited third-party acquisition proposal.

No-shop provisions are particularly critical for the purchasers in public M&A transactions because these deals must be announced to the public when the parties enter into a letter of intent and when the definitive acquisition agreement is signed. Public announcement provides third parties with opportunities to review the terms of the transaction and make a competing bid before the transaction is closed. No-shop provisions therefore can provide the purchasers with some measure of control and security over the competing bids the vendor(s) may consider.

Common Exceptions to No-Shops

In public M&A transactions, the vendor(s) and/or target corporation generally allow no-shop provisions to be included in the definitive acquisition agreement, but they often press for certain exceptions which may consist of the following:

• Window-shop exception – to allow the vendor(s) and/or target corporation to discuss and negotiate unsolicited proposals from third parties, subject to certain conditions and covenants set out in the definitive acquisition agreement.
• Fiduciary out – to permit directors of the target corporation to accept, approve, or enter into a definitive acquisition agreement with a third party in case of a superior proposal.
• Go-shop provision – to allow the target corporation to seek, discuss, and negotiate an alternative transaction with third parties within a specified time frame (which typically ranges from 25 to 50 days) if the target corporation has not conducted a market check. However, a go-shop provision is generally not a common provision in Canada.

Negotiations for exceptions generally need to balance the directors’ fiduciary duties to the target corporation against the purchasers’ concerns to protect their corporate interests.

Assistance with No-Shop Provisions

Negotiating beneficial no-shop provisions that include appropriate exceptions is critical to the success of a corporate acquisition. The experienced team at R&D LLP can help you strategize to develop and negotiate suitable provisions to fulfill your business objectives in an M&A transaction.

For help with no-shop provisions or to learn more about your options and the implications of each, contact us at your convenience.